Seed Investors

The who, what, where and how of African agriculture investing

Whether for profit or social motives - and often both - an increasing number of investors are targeting opportunities in African agriculture. At the same time innovative approaches for deploying aid to support farming businesses linked to smallholders are emerging. This blog provides a snapshot of who is doing what, where and how.

17 November 2015

There is an old Portuguese saying that you cannot expect the sun to shine on the threshing floor while it rains in the turnip fields. Some are just as doubtful that impact investors can simultaneously deliver market returns and measurable social impact. The harder investors pursue social goals in sectors where commercial capital is absent, they argue, the more likely financial returns will suffer.

Threshing - Boris Kustodiev (1908)

Others disagree. In June this year, Cambridge Associates released a report showing impact investment funds with combined assets of $6.4 billion had returned almost 7% after management fees. Jessica Matthews of Cambridge Associates said: “There’s a view among some investors that impact investing necessarily entails a sacrifice in financial return. This data helps to show that is more perception than reality”. Or as ClearlySo, a UK impact advisory firm puts it "there's no impact see-saw".

Impact investing is still a young industry with diverse players, operating in multiple sectors and following varied approaches. Organisations like the Global Impact Investor Network (45% of whose members say they target below-market returns) are gathering the performance data. But it will take time – possibly five years or more – before sufficient evidence emerges to allow a meaningful taxonomy of return expectations for different types of impact funds.

AgDevCo invests in the agriculture sector in Sub-Saharan Africa, focusing on early-stage businesses that are starved of capital. To date we have backed 45 SME businesses and committed $60m. There’s little doubt that investing in agriculture can deliver a high social pay-off. But what level of financial returns should we expect?

There are data points from outside the impact investing community. The development finance institutions (DFIs) have been investing in emerging markets including agriculture for fifty years or more (maybe impact investing is not as cutting edge as some like to think!).
•The UK’s CDC specialised in agriculture investments during the period 1950 – 2000. A recent research paper concluded that only a third of investments generated financial returns above an “acceptable commercial level” of 12%. However, in many cases where CDC lost money, the business it supported went on to become sustainable operations which created significant positive social impact and delivered commercial returns for later-stage investors.
•The IFC has published returns data on more than 300 exists from SME businesses (across all sectors). Investments above $2 million delivered good financial returns and an acceptable level of write-offs. However, investments below $2 million were generally not profitable and write-offs reached 20-30%.
•Members of the European Development Finance Institutions (EDFI), an association of bilateral DFIs, report that only 5% of new investments made in 2014 were in the agriculture sector, whereas agriculture makes up at least 25% of GDP in most developing countries.

We draw two tentative conclusions. Firstly, in developing countries agriculture does not appear to offer financial returns that are as attractive and/ or requires more patience than other sectors such as financial services, infrastructure and manufacturing (otherwise DFIs would be more heavily weighted towards agriculture). Secondly, for investments below one or two million dollars, financial returns are likely to be lower, if not negative, and the risks of business failure are significantly higher. However, as companies mature they should be able to generate better financial returns, so graduation to commercial capital is a real possibility.

AgDevCo’s experience to date is more or less in line with this. With an average investment size of below $1.5m, we are expecting to recover our invested capital and make a modest contribution to our running costs. As we expand and balance out the portfolio with some larger investments, we anticipate moving towards net profitability. In the meantime, part of our operating costs will continue to need grant funding.

What does this mean for the prospects of attracting more commercial capital into the agriculture sector? The need in developing countries is huge, perhaps $83 billion annually per the FAO.
Given the high risk-low return characteristics of agriculture in developing countries, and the fact that most opportunities are at the smaller end of the spectrum where returns can be swamped by transaction costs, it is unlikely the sector is going to attract large volumes of commercial capital any time soon.

The good news is that innovation is driving new investment approaches which offer a way of leveraging commercial capital into these markets.

Blended finance models are a sub-category of impact investment approaches. They mix public, philanthropic and private capital in ways that compensate investors for risk-taking where there is the possibility of high social returns.

My Portuguese colleague tells me only her grandparents’ generation still use the threshing floor proverb, which no longer resonates in a modern economy. If impact investing embraces blended finance, it may get to the point where the old debate about impact versus financial returns also becomes obsolete.

Chris Isaac is a founding Director of AgDevCo, a social impact investor in the African agriculture sector. He is speaking on blended finance approaches at the Convergence “Blended Finance for Agriculture” conference in partnership with Citi and UNEP in London on Friday 20th November 2015.

15 June 2015

CAPE TOWN (June 3, 2015) — KfW, the German Development Bank on behalf of the German Ministry of Economic Cooperation and Development (BMZ), along with AgDevCo and Root Capital, today announced the launch of the Lending for African Farming Company (LAFCo). The company will finance agricultural enterprises throughout sub-Saharan Africa to enhance local food security and stimulate inclusive economic growth in the region.

Announced at the 2015 Grow Africa Investment Forum during the World Economic Forum on Africa, LAFCo aims to increase smallholder farmer productivity and incomes through better integration in local and regional agricultural value chains, and improved access to formal markets. With an anchor commitment from KfW, using funds from the German government, and additional investment by AgDevCo, which initiated the project with the support of UKAid, LAFCo will accommodate the working capital needs of agricultural enterprises. It will be managed by Root Capital and will provide lines of credit and other flexible debt products in amounts of up to $4 million, denominated in both U.S. dollars and local currencies.

Presenting the investment, Jenny Scharrer, senior project manager of KfW, commented: “The barriers to improving food security and alleviating poverty are numerous and complex. By investing in LAFCo and supporting the businesses that work with smallholder farmers, KfW is seeking to demonstrate new and innovative approaches to development finance. Guided by the shared values and impact philosophies of its sponsors and manager, LAFCo will help fill a critical financing gap and support the equitable and inclusive growth of this sector.”

The new collaboration comes at a time when the need for capital is increasing for agricultural businesses throughout the region. However, many of these enterprises are unable to access sufficient financing from commercial banks or other financial institutions. Beginning immediately, LAFCo will provide debt financing to a wide range of agricultural enterprises, including cooperatives and private businesses. Lending activities will take place across sub-Saharan Africa, with a particular focus on Ghana, Kenya, Malawi, Senegal, Tanzania, Uganda and Zambia.

“The potential of Africa’s agricultural sector has attracted significant interest from equity investors, but the day-to-day financing needs of businesses are often overlooked,” explained Chris Isaac, director of investments at AgDevCo. “We’re delighted to partner with KfW and Root Capital to help African entrepreneurs and farmers access the capital they need to grow profitable businesses. Investment in agriculture means higher incomes, more jobs and increased food security.”

According to the Alliance for a Green Revolution in Africa, sub-Saharan Africa is home to 60 percent of the world’s uncultivated arable land. Despite its production potential, Africa’s crop yields are between one-third and one-half of the global average, and more than 200 million individuals are chronically undernourished, the majority of them living in rural areas. To help address these challenges, LAFCo will finance agricultural enterprises that purchase crops from smallholder farmers, or that provide them with yield-enhancing products, such as seeds and fertilizers, and related services.

“If Africa is to meet the challenge of sustainably feeding a rapidly growing population in ways that also contribute to poverty alleviation, reliable access to finance is essential,” said Nate Schaffran, senior vice president of lending at Root Capital. “With 15 years of experience in lending to agricultural enterprises, Root Capital is honored to manage LAFCo and help catalyze a broader financial market to benefit Africa’s smallholder farmers.”

Beginning with a first close of $15 million in committed funds, LAFCo aims to become a leading provider of capital for businesses operating in Africa’s local and regional agricultural value chains. The innovative “blended finance” structure of LAFCo, which combines public and philanthropic funding with private capital, will allow it to serve parts of the market that are generally not being served by commercial banks or other financial institutions.

LAFCo was developed with the support of Dalberg Global Development Advisors and in collaboration with the Grow Africa Finance Working Group. Founded jointly in 2011 by the African Union, The New Partnership for Africa's Development (NEPAD) and the World Economic Forum, Grow Africa works to increase private-sector investment in agriculture and accelerate the execution and impact of investment commitments.

30 May 2015

Africa is growing faster than any other continent. It has a
middle class which is set to triple in size by 2030. Private equity investment deals
reached $8.1 billion last year, with investors betting on financial services, consumer goods and property. Diversification of
investment activity from extractives holds promise for higher job creation
and broader based growth.

But the agriculture sector lags behind, despite its enormous
potential. Food imports are already running at $35 billion annually and could
double over the next decade. African farmers’ yields fall well below global averages. Per the latest
UN statistics, the number of undernourished people continues to rise (from 175 million
in 1992 to over 220 million today).

The need for private investment and expertise to help unlock
the potential of agriculture is widely recognised. Farming is a business that
requires an entrepreneurial approach and plenty of risk capital, whether at the
smallholder level or for large mechanized farms. The sector will not achieve
take-off if reliant on public sector support and hand-outs, which has been a
tendency in the past.

The problem is that private capital is not reaching the
agriculture sector, for three main reasons. Firstly, logistics costs are high,
mainly because of weak infrastructure. Secondly, agriculture is inherently risky and
requires specialist and locally-adapted knowledge. Thirdly, most agribusiness investment
opportunities are small and early-stage, which makes due diligence and
transaction costs prohibitive.

So what is to be done? One approach is to wait. The policy
environment is improving; roads, telecommunications and power networks
are reaching the most remote areas; a highly skilled African diaspora is returning
home; capital markets are becoming more sophisticated. The best opportunities should rise to the top and private investors should be able to
find them.

However, in AgDevCo’s view, it may take ten years or more
before the agriculture sector matures to the point where it can attract
sufficient volumes of commercial investment. In that time 122 million young
people will have entered the workforce, according to a recent McKinsey study.
Without investment in agriculture it is unclear whether Africa can create
enough jobs to take advantage of its “demographic dividend”.

Blended finance funds are a possible solution. These hybrid fund structures combine public, philanthropic and private capital. The non-commercial capital acts as a first
loss cushion, with the objective of leveraging larger volumes of private finance into markets where risks are high and financial returns uncertain, but
there is the possibility of major positive social impact.

These types of funds have an ability to invest with new entrepreneurs
and early-stage businesses, allowing them to build a track record, which should
help them access later rounds of commercial capital. By making
smart investments, blended finance funds aim to demonstrate that the
cost and risks of operating in certain markets are not as high as some
investors might think.

With agriculture investment in Sub-Saharan Africa estimated
as being 11 times more effective in reducing poverty than investment in any
other sector, a blended finance fund focused on SME agribusinesses could make a
major contribution to food security, economic growth and poverty reduction,
while demonstrating that agriculture can be a profitable business.

WATCH THIS SPACE: with international partners AgDevCo will be announcing a new blended financing facility
for African agriculture at the World Economic Forum Africa meetings in Cape Town on 3
June 2015. More details will follow soon . . .

1 October 2014

This article written by Chris Isaac of AgDevCo first appeared hereon the European Venture Capital Association (EVPA) website on 1st October 2014.

It is a huge opportunity. According to the United Nations’ Food & Agriculture Organisation (FAO), $35 billion worth of agricultural goods is imported into Africa annually. With a growing middle class and a population set to reach two billion by 2050, demand for more and better quality food will continue to rise. There are large areas of arable land and plentiful water resources in many parts of Africa. Surely investors can play a role in reversing the flow of food imports? With the right types of capital and expertise, Africa should be able to feed itself and sell a surplus to the rest of the world.

There’s a strong developmental case for investing in African agriculture, not least to create the job opportunities for a young and rapidly growing workforce. 700 million people are set to enter the workforce in the next 30 years. Per the World Bank, growth in agriculture is 2.5 times more effective in reducing extreme poverty than growth in the rest of the economy.

But in the short-term the investment case for African agriculture remains unclear. Competing with highly efficient producers in Latin America, Europe and the Far East is not easy, even when you benefit from transport cost advantages. The landed price at African ports of frozen chicken from Brazil, rice from Thailand or palm oil from Indonesia is often lower than the local cost of production. Unpredictable import tariff regimes don’t help.

Production costs are high because African agriculture is still largely an infant industry, which receives little of the support that is taken for granted in developed countries. In Europe, farm subsidies average more than €200 per hectare, which is more than the income most African smallholder farmers earn from crop sales. Public spending on research and development in Africa is a fraction of other regions in the world. Investors face additional challenges of poor roads and power networks, a lack of service providers, complex local bureaucracy and a scarcity of experienced management. If a tractor breaks down it can take days to get spare parts sent via international courier; producing accounts can be a challenge when the nearest qualified accountant is over 1,000km away in the capital city.

The main access road to the Kilombero Valley, in southern Tanzania, during the
wet season.

Investing in agriculture requires a long-term approach. In AgDevCo’s experience, there are no easy returns to be made, especially in primary production (i.e. growing crops). Proper consultation and engagement with local communities – about land rights, jobs and outgrower schemes – is necessary, not only because it is the right thing to do, but because it makes for a more sustainable investment. A full understanding of environmental risks and how to manage them is also essential. It all takes time and money.

Understandably the commercial banks, as guardians of their depositors’ funds, are wary of agriculture given the high risks. There has been a surge of interest in Africa recently by private equity funds, but the majority focus on sectors that offer higher returns such as financial services, healthcare or property. Where PE funds do look at agriculture they shy away from farming, preferring well-established trading or processing businesses, and they tend to invest no less than $10 million at a time.

Within this context, AgDevCo believes that unlocking Africa’s agriculture potential requires a new approach: social venture capital. Social venture capital can step into the gap between aid and fully commercial capital. It brings the discipline of an investment approach with a willingness to take risks in exchange for high social impact. It is prepared to absorb the relatively high transactions costs (due diligence, legal etc.) associated with smaller deal sizes ($500,000 to $5 million) for early-stage businesses. At the portfolio level, taking into account successes and failures, it is satisfied with capital recovery or modest single digit returns net of costs.

A member of the
Phata Coop, an AgDevCo investee in Malawi, tends an irrigated beans
crop.

If private foundations, high net worth individuals and family offices could be persuaded to allocate part of their portfolios to African agriculture, through a social venture capital model, it might just be enough over a number of years to kick-start a critical mass of investment, which would catalyse the entry of more investors and service providers, and help the agriculture sector escape the infant industry trap.

For investors with a long-term outlook, who care about the state of the world, there are few better ways of investing with a social purpose than supporting African agriculture. Those who get in early may even find that, when the tipping point comes, they are well-placed to reap the financial rewards. Some social investors might choose to recover their capital, others may decide to recycle it, putting their philanthropic funds to work many times over. That’s real bang for the buck.

23 June 2014

On Thurdsay 19th June, President Guebuza of Mozambique visited the Empresa de Comercialização Agricola (ECA) maize mill in Catandica, central Mozambique. ECA is a for-profit company working with over 5,000 smallholder farmers, who receive inputs, technical support and a guaranteed market for their produce.

President Guebuza inspects ECA's maize flour products

The company was founded four years ago with seed capital from AgDevCo, which allowed investment into storage and processing and the development of an organised outgrower farmer network. To date AgDevCo has invested about $2 million as long term debt and equity. You can watch a short film about ECA by clicking on the image below.

Today ECA has commercial relationships with SAB Miller, Cargill and Buhler all of which are helping the company to scale up its operations and expand the number of farmers it is working with.

10 June 2014

In mid-2013, AgDevCo provided a loan of USD0.5 million to
the Phata Sugarcane Cooperative, a smallholder farmers’ cooperative in southern
Malawi, as part of a project to install a modern irrigation system on 300
hectares of land.

The Coop members are guaranteed a market for their sugarcane
at fair prices under a long-term sales contract with Illovo Malawi, a
subsidiary of Associated British Foods (ABF). A Malawian farm management
services company, Agricane, has been contracted by the Coop to manage the
commercial farming operations.

The irrigation scheme includes 10 ha for food crops, allowing
farmers to grow maize, beans and vegetables all-year-round. The community is
also experimenting with fish farming and rice paddies. Previously farmers in
this part of Malawi had to rely on a single, unpredictable rainy season lasting only 3-4
months.

Phata Coop member tending irrigated food crops

AgDevCo is partnering with the Coop to build strong governance
and financial management systems; and to help manage the relationships with
Illovo and Agricane. There is potential for a second phase expansion of the scheme
by a further 450 ha.

A €2.4m grant from the European Union (EU) helped fund the
initial construction of the irrigation system. AgDevCo’s loan was used as
working capital for the first growing season. The results of the harvest were
impressive, with sugarcane yields of 106 tonnes/ha. The Coop believes it can
improve productivity by a further 10% next season.

The project provides a reliable and secured income for the
Coop’s 378 members. Total revenue in the first year of production was USD1.27m,
which returned a net profit to the Coop of $450,000. Profits will be partly
reinvested in the Coop’s activities and partly distributed to members.

Chris Isaac, AgDevCo’s Director responsible for Malawi said:

“The impressive early results of this investment show what can be achieved when
farmers have irrigation and are linked to markets. Grant funding was needed to
kick-start the project, but now the Phata Coop is a commercially-viable
business, which we expect to go from strength to strength”.

6 June 2014

AgDevCo is delighted to announce a USD1.5 million investment into Rungwe Avocado Company (RAC), an avocado growing and export business based in Tukuyu, in the Rungwe region of southwest Tanzania.

RAC is a pioneer in the development of Tanzania’s horticulture industry. In 2009, it was the first ever farming business to trial avocado exports by air freight to European markets. Today RAC is establishing refrigerated sea shipment routes to Europe and beyond – another important breakthrough for the industry.

The business is helping to improve the living standards of local farmers. RAC engages over 3,000 smallholders as part of its outgrower network. Farmers receive inputs and training as well as a fair price for their production. By 2018, over 75% of the avocados sold by RAC are expected to be grown by local farmers, resulting in some USD0.8m being paid annually into the local community.

RAC is set to receive a USD1.2m loan from AgDevCo with another USD0.3m invested in the form of equity. The investment will support the installation of a micro jet irrigation system on the commercial farm to boost yield performance. It will also fund ongoing operations, including management of the outgrower scheme.

AgDevCo is supporting a range of horticulture projects in Sub-Saharan Africa. We believe that by helping socially-responsible businesses like RAC to access international markets we can contribute to the modernisation of the agriculture sector and help deliver better incomes for thousands of smallholder farmers.

Charitable Foundations

About me

Chris Isaac is a founding director of AgDevCo, a >US$200 million social venture capital fund which invests in farming and agri-processing enterprises in Sub-Saharan Africa. Backed by development agencies and private foundations. AgDevCo’s mission is to reduce poverty, create jobs and improve food security. AgDevCo operates in eight countries (Ghana, Malawi, Mozambique, Rwanda, Sierra Leone, Tanzania, Uganda and Zambia) and has a rapidly growing portfolio, with more than 50 investments made to date.